It should work without having to do any major tweaking. Make sure the appropriate input device (Pcm, Line, Mic...) is showing in that dropdown box next to the volume sliders. Also, make sure the device is not muted or turned down in your audio mixer (e.g. wmix).

By the way, I just uploaded a shiny new version of Audacity a few minutes ago...it might show up in the mydsl testing repository sometime before the year's end =o)